Netflix drops sharply after report of slower growth

Netflix CEO Reed Hastings announced Monday that the company expects slow growth in the next quarter as it shifts from DVD-by-mail to online TV streaming. (Justin Sullivan/Getty Images)

Netflix stock dropped almost 14 percent Tuesday morning after the company reported its streaming subscriber growth is likely to slow this quarter.

Netflix picked up 3 million new online streaming subscribers last quarter, but it expects slow growth next quarter as it tries to expand TV streaming and retain DVD-by-mail subscribers.

In a letter to shareholders, executives at the Los Gatos company projected that it would only gain between 200,000 and 800,000 net streaming subscribers in the second quarter, compared to a net gain of 1.7 million in the previous quarter.

Shareholders balked at the announcement, and stock dropped in after-hours trading and continued Tuesday morning. The company’s stock is down 65 percent in the last year.

The company is still recovering from last fall’s snafu when the company raised prices without adding services and unsuccessfully tried to spin off its DVD-by-mail program into Qwikster.

DVD-by-mail services still account for 46 percent of the company’s profits despite having less than half as many subscribers as the streaming service. And while the mail service is dropping subscribers like flies as customers shift to streaming, the loss rate is declining: 2.8 million subscribers left two quarters ago, but only 1.1 million left last quarter.

Streaming services, on the other hand, only accounted for 13 percent of profits for last quarter. Still, the letter noted, “the trend towards watching episodic TV, like ‘Breaking Bad,’ on Netflix continues to grow.”

The company lost $5 million last quarter but expects to return to profitability this quarter. Its projected profits for the quarter range from a loss of $6 million to a gain of $8 million.

Internationally, the company gained 1.2 new subscribers and saw success with its launches in the United Kingdom and Ireland, but faced difficulties with expanding in Latin America because of cultural distrust of e-commerce and underdeveloped internet infrastructure, the letter said.